volcker criticizes obama plan on ‘systemically

By Mike Dorning Sept. 24(Bloomberg) -- Former Federal Reserve ChairmanPaul Volcker criticized the Obama administration’s plan tosubject “systemically important” financial firms to morestringent regulation by the Fed. Volcker toldlawmakers today that such a designation wouldimply government readiness to support the firms in a crisis,encouraging even more risky behavior in a phenomenon known as“moral hazard.” “Whetherthey say it or not, that carries the connotationin the market that they’re too big to fail,” Volcker, who ischairman of the White House Economic Recovery Advisory Board,said in testimony to the House Financial Services Committee. Volcker, 82,testified as the House panel begins itsconsideration of the administration’s proposed regulatoryoverhaul, which is intended to curb some of the practicesblamed for sparking the worst financial crisis since theGreatDepression. He appeared one day after Treasury SecretaryTimothy Geithner came before the committee to make the caseforthe Obama plan. “The dangeris the spread of moral hazard could make thenext crisis much bigger,” said Volcker, who serves as anoutside economic adviser to Obama. Volcker has criticized keyelements of the Obama administration regulatory plan inrecentpublic statements, and his remarks today largely reprisedthosecriticisms.

Stricter Controls

Volckeralso called for stricter controls on commercialbanks and bank holding companies than the Obamaadministrationhas proposed, saying they should be barred from owning orsponsoring hedge funds and private equity funds and forbiddento engage in proprietary trading. He alsocriticized an administration proposal to create acouncil of regulatory agencies that would be headed by theTreasury Department. Instead, he called on lawmakers to givethe central bank more authority to oversee the financialsystem. “It’s anatural function for the Federal Reserve,”Volcker said. “There’s no doubt when you get into trouble,when anybody in the financial market gets into trouble, theyrun to the Federal Reserve.” Volcker saidthe Fed should coordinate the activities ofU.S. agencies that regulate financial institutions. He saidthepresident should nominate a second Fed vice chairmanresponsible for financial regulation and supervision in orderto “pinpoint responsibility” for those activities.

Too Much Power

The Obamaadministration plan has also drawn criticismfrom lawmakers including Senate Banking Chairman ChristopherDodd, Democrat of Connecticut, who have argued that the WhiteHouse would give the Fed too much power. Instead, Dodd andother members of Congress are leaning toward vestingauthorityover big banks in the council of regulators that Volckeropposes. Beforequestioning Volcker, Rep. Mel Watt, a Democrat ofNorth Carolina, offered a nod to the influence of the formerFed chairman, who led the central bank from 1979 to 1987.UnderVolcker, the Fed raised its benchmark interest rate as highas20 percent in 1980 to throttle inflation. “There seemto be two financial gurus,” Watt said, afternaming former Fed Chairman Alan Greenspan. “You are the otherone.”